UK May Inflation data doesn’t make the BoE’s monetary policy decision any easier

Despite the recent surge in oil prices and the timing of Easter this year inflation remained steady in May 2018, according to the Office for National Statistics (ONS).

Annual headline inflation grew by 2.4pct in May, unchanged from last month and in line with expectations. The core print (that excludes energy, food, alcohol and tobacco) also remained on hold, rising 2.1pct matching expectations.

The CPIH measure, the ONS preferred measure saw annual inflation rise marginally to 2.3pct in May 2018 from 2.2pct in April 2018.

ONS pointed to rising motor fuel prices as the largest upward contributing factor adding 0.8pct), alongside large upward effects from transport costs (air and sea fares) up 4.1pct in May, rising by less than a year-ago, due to the timing of Easter. The dampening offset came from computer games and food prices, slowing to 2.3pct from 2.7pct.

Pipeline inflation proved to be more dynamic, with input prices lifted by the recent rise in crude oil prices. Annul PPI rose 9.2pct on the year to May 2018, up from 5.6pct in April 2018, beating median forecasts of 7.6pct and last month’s 2.5pct. ONS reporting that the year-on-year increase was the highest rate since June 2017; with crude oil continuing to exert the largest upward effect on prices.

Headline Output prices (goods leaving the factory gate) rose 2.9pct on the year to May 2018, rising from 2.5pct seen in April; in line with the median estimate. ONS noting that all industries lent a positive contribution to annual output inflation; the largest coming from petroleum products.

On the housing front, average house prices in the UK increased 3.9pct annually in April 2018, down from 4.2pct seen in March of this year. This marked the lowest y/y rate since March 2017 when it was 3.7pct.

Commenting on today’s UK CPI figures, Tom Stevenson, investment director for Personal Investing at Fidelity International said, “Today’s stalled inflation rate suggests the Bank of England may have missed the opportunity to raise interest rates this year. With UK CPI stuck at 2.4% despite rising petrol prices and higher airfares, the release confirms the underlying weakness of the UK economy.

“The Bank of England is desperate to lift interest rates off the floor in order to provide some dry powder for when the next downturn bites. If interest rates remain close to zero, the central bank will struggle to offset a slowing economy when it needs to. With inflation heading back to target, and the link between buoyant employment and price rises now apparently broken, the Old Lady looks increasingly powerless to act.”

It is worth pointing out that the BoE’s Monetary Policy Committee in its May Inflation Report forecast annual inflation to hold steady at 2.4pct, with potential for a small over the next few months. Indeed, Capital Economics’ Senior UK economist, Ruth Gregory believes that, “All in all, [sic] the inflation figures have not altered our view that the MPC will probably press ahead and raise interest rates in August.

The other argument suggests that the Bank will likely have to wait for further evidence of a sustained firmness in the path of inflation and this will depend very much on how growth develops.

Howard Archer, chief economic advisor to the EY ITEM Club: “We suspect that domestic price pressures will firm only slowly over the coming months amid no more than middle of the road UK growth. Regular earnings growth is picking up only gradually (and actually relapsed in April) despite the tight labour market, and we expect this to remain the case. Some companies remain keen to limit their total costs in a challenging and uncertain environment. Fragile consumer confidence will likely deter some workers from pushing hard for markedly increased pay rises, despite recent higher inflation and a tight labour market.

Harry Daniels – LiveSquawk News

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